Corporate strategies of Skanska Construction

Corporate strategies of Skanska Construction Strategic planning and strategic management have attracted continuing interest from both researchers and executives over past decades. Strategic decision making although recently taken into account in the construction industry is one of the key drivers of success. Since construction is a project-based and highly fragmented industry, corporate strategies are difficult to develop. Studies so far point out the significance of project management competencies in delivering successful projects, however the organizational performance heavily rely on the effectiveness of the strategic decisions made by the companies based on their competitive resources and the market conditions where they operate. In this work, a world-known construction company, Skanska Construction from Sweden, is taken as a case and its corporate strategies together with its competitive resources are analyzed. Future directions for the company are discussed in the light of the challenges faced by the company. Keywords: Corporate strategy, construction industry, strategic analysis. INTRODUCTION It is generally considered that modern organizations should develop long term strategies in the face of an increasingly dynamic and competitive world. Porter (1980, 1985) suggested that a company needs to develop a competitive strategy in order to achieve competitive advantage in a market economy. Strategy has grown from a practice of military commanders and corporate executives into the field of management science. It has enjoyed contributions from various disciplines such as economics, organizational sociology, political science and cognitive psychology (Rumelt et al., 1994). Differing perspectives of strategy development and implementation have evolved, centering generally on ones view of the capacity and motives of individuals and organizations (Whittington, 2001). Mainstream strategic studies, however, have not typically considered the construction industry, and conventional thought within the industry has often downplayed strategys significance. Strategy is defined as a plan, pattern, position, perspective, and ploy (Mintzberg et al., 1998). Its significant effect on performance is demonstrated empirically in the literature (Porter, 1980). Emphasizing the importance of strategic decision, Child (1972) also stated that companies can achieve higher organizational performance by adopting different competitive positioning alternatives based on strategic decisions. Lately, construction industry researchers have changed this perception to some degree as publications regarding strategic management have increased. Warszawski (1996) outlined a methodological procedure for strategic planning in construction companies. Serving as somewhat of a primer to construction professionals on the topic, he discussed the definition of companys mission, the significance of business environment, and a broad outline of the steps involved in analyzing a companys resources. His elaboration on the development of competitive strategy was based largely on Porters (1980) theory of generic strategy. Chinowsky and Meredith (2000) conducted a survey to identify areas of strategic concern that construction organizations need to emphasize. Venegas and Alarcon (1997) were the first to propose a simplified model of variables affecting strategic decisions before recommending a mathematical model to predict the impact of the decisions. In this paper, the corporate strategies of a very well known Swedish construction company, Skanska Construction, will be analyzed. In doing so, first of all the components of corporate strategy will be investigated based on a literature review. The performance models that examined the importance of strategies and competitive resources will also be included as a part of this study. The major section will deal with Skanskas success based on its corporate strategies and competitive resources. Besides, the external factors including the market conditions together will be discussed along with the future directions of the company. CORPORATE STRATEGY IN CONSTRUCTION INDUSTRY Corporate Strategy Cheah and Garvin (2004) developed a framework to define corporate strategy. The model divides corporate strategy into seven strategic fields as shown in Figure 1. All strategic fields rightly are separate, major components within the realm of corporate strategy. Whereas some strategic models such as Porters (1985) value chain concept treated activities like human resource (HR) management merely as supporting activities, this model casts these strategic fields as distinct areas since they have currently evolved into disciplines requiring separate planning and execution. As evidence, most business schools at present offer separate courses for each of these fields after a general treatment of the topic of strategic management. Figure 1: Framework for corporate strategy (Cheah and Garvin, 2004) The following sections summarize the dimensions of corporate strategy being HR strategy, financial strategy, business strategy, operational strategy, IT strategy, marketing strategy, and technology strategy. HR strategy In essence, HR strategy is more concerned about the aspects of managing human assets of an organization. HR strategy deals with (Cheah and Garvin, 2004): personnel management (e.g. training programs; job rotation among functions and geographical regions); industrial relations (e.g. employment law; union-management relationship; negotiation tactics and strategy); incentives and compensation policies and systems; and restructuring concerns (e.g. downsizing). The goal of HR strategy is to have an effective system for obtaining (recruiting), training, mobilizing and managing the human assets of an organization to systematically carry out business operations and new ventures. Financial strategy There are two fundamental aspects in financial strategy: investment decisions and financing decisions. During investment decisions, firms are confronted with the challenges of capital budgeting and financial resource allocation. In order to make better decisions, managers must select the appropriate tools for project analysis and evaluation, which include, but are not limited to, the net present value (NPV) method, decision tree analysis, optimization, portfolio planning and real option valuation. Behind these tools lies a common and fundamental principle of balancing risk and return (Cheah and Garvin, 2004). Financing decisions, on the other hand, are concerned with issues of capital structure. In providing the detailed mechanics, Grinblatt and Titman (1998) showed how investment and financing decisions could impact the corporate strategy as a whole. Business strategy Business strategy is defined as strategies adopted to ensure successful ventures of individual business units, whereas corporate strategy is concerned with operations of the entire organization. This distinction is obviously consistent with the model, since business strategy is one of the seven core fields of the overall structure (Cheah and Garvin, 2004). Business strategy formally deals with the development of competitive advantage and core competencies. In particular, Porters (1980, 1985) techniques such as the determination of uniqueness and cost drivers, the Five Forces model, and the market segmentation matrix are some commonly known concepts in formulating business strategy. Operational strategy Operational strategy is primarily concerned with execution and implementation how firms manage their operational processes to convert different inputs into final products and services. These activities might include inbound and outbound logistics, procurement functions, production processes for physical products such as precast components, and procedural functions for service provision. For contractors, these activities are analogous to most project management functions such as material procurement, construction of the physical structure, and management of labor and machinery. Likewise, service firms utilize their expertise and knowledge to assist clients in fulfilling their needs and goals, as in planning, design and engineering functions (Cheah and Garvin, 2004). IT strategy In this conceptual model, IT strategy is separated from technology strategy. Specifically, IT strategy focuses mainly on the use of technology to leverage information to the advantage of a firm. This contrasts with other types of technology development in general. This distinction is justified by the fact that information technology has grown into a separate market segment and research area since the mid-1990s (Cheah and Garvin, 2004). IT is often taken as the driver of corporate strategy. More appropriately, it should be treated as an enabler that connects the corporate strategy of a firm with its operational processes (Ross and Rockart, 1999). In many aspects, the current trends of IT investment and implementation within the construction industry still appear to follow very vague goals. Too often, participants from the industry investing in IT (at least during initial stages) have forgotten their original identity as firms that provide construction services, thereby putting their core competencies at stake. In many cases, these investments are lacking in terms of establishing linkages between processes and corporate strategy in the long run (Cheah and Garvin, 2004). Marketing strategy In manufacturing and other industries that sell physical products, the Four Ps (product, price, place and promotion) in conventional marketing management remains relevant at present, though changes in technology and IT have redefined the boundary and meaning of these components (Cheah and Garvin, 2004). Although construction is mainly service-oriented (except suppliers or vendors who are selling physical products), many of these concepts can be applied to selected parts of the construction value chain. For example, in terms of promotion, marketing strategy is especially important in signaling to clients the value created from the design of products and services in order to demand a price premium differentiation is meaningless unless clients are able to perceive the value added that suits their unique needs. To achieve this, firms need to identify both needs (demand) and resources (supply factors), and choose the most efficient means of service provision. Some common corporate involv ement in marketing strategy includes: umbrella branding and reputation building; logistics issues (a critical factor toward lean construction); and collection of information about clients needs (e.g. to improve facility operation and maintenance) (Cheah and Garvin, 2004). Technology strategy Tatum (1988) illustrated that the range of possible technology-based strategies for construction firms is wide. At present, choices and means for technology development still remain as the most basic questions in technology strategy. Three primary issues particularly stand out. The first issue is the notion of pioneer versus follower. Not surprisingly, whether one should be at the bleeding edge of the technology wave as a first mover is always a tough decision to make. This is especially true when technological trends are shaped by uncertain environmental factors. The second issue deals with integration. Large Japanese contractors, for example, have their own research institutes and tend to develop their technology internally. Third, firms have to assess the relative importance between basic and applied research in order to allocate resources accordingly (Cheah and Garvin, 2004). Corporate performance in construction Based on Isiks (2009) work, a construction companys performance is mainly determined by the strategic decisions made and resources and capabilities of the firm. External factors, strength of relationships, project management competencies, and project performance are the other factors of success. These variables are listed in Table 1. Since this papers major objective is to discuss the corporate strategy and competitive resources impacting on the success of a construction firm, the main emphasis is on the strategic decisions and resources and capabilities leading to success as defined by Isik (2009). Construction organizations have long been criticized for a lack of long-term strategic planning and management (Veshoskyi, 1994; Chinovsky and Meredith, 2000). The literature on strategic decision-making is spread over a wide range from an individual strategists perspective to strategic management techniques, to the implementation of these techniques in real situations (Globerson, 1985; Letza, 1996; Warszawski, 1996; Neely et al., 1997). The strategies adopted in Isiks (2009) work represent the characteristics of the construction industry as a project-based organization. These strategies are summarized in the following section. Table 1: Factors affecting the corporate performance for construction firms (Isik, 2009) Corporate strategies in construction firms: Corporate strategy can be seen as the linking process between the management of the organizations internal resources and its external relationships with its customers, suppliers, competitors and the economic and social environment in which it exists. The organisation develops these relationships from its abilities and resources. Hence, the organisation uses its history, skills, resources, knowledge and various concepts to explore its future actions (Adnan and Jusoff, 2009). The industry environment is the set of factors that directly influences a firm and its competitive actions and competitive response; the threats of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes and the intensity of rivalry among competitors. An opportunity is a condition in the general environment that if, exploited helps a company achieve strategic competitiveness. A threat is a condition in the general environment that may hinder a companys efforts to achieve strate gic competitiveness. The resources of an organisation include its human resource skills, the investment and the capital in every part of the organisation. Organisations need to develop corporate strategies to optimise the use of these resources. Differentiation strategies refer to the differentiation of products or services that provides competitive advantage and allows a company to deal effectively with the threat of new entrants to the market (Porter, 1980). Many new construction companies enter the industry every year because starting a new company does not require a large investment; consequently the construction industry becomes more competitive and forces existing companies to seek advantages over competitors by means of differentiation strategies. Market, project, client and partner selection strategies are related to the characteristics of construction projects such as the location and complexity of the project, environmental conditions, availability of competent subcontractors, availability of materials, equipment and know-how locally, financial stability of the client, and potential partners that have capabilities that the company does not possess. Project management strategies can be developed by referring to the mission of the company and the companys business environment. The managerial functions of a project include activities such as planning, cost control, quality control, risk management, safety management, to name but a few. In order to achieve project goals, adequate strategies have to be set up relative to these functions. Investment strategies occur along several dimensions such as capabilities of the company (resources), pricing (financial decisions), product (construction project related factors), and finally research and development (Spence, 1979). Organizational management strategies involve decisions pertaining to the companys reporting structure, planning, controlling and coordinating systems, as well as the management of the informal relations among the different parties within the company (Barney, 1991). Resources and capabilities: The strategic management literature defines resources and capabilities as the strengths of a company. Given the competitive environment among the rivals, resources and capabilities cannot be assumed to be identical in every company (Porter, 1980; Barney, 1991). According to the resource-based perspective mentioned by Barney (1991), a companys resources and capabilities have to be valuable, rare, inimitable, and should lack substitutes to have a positive effect on performance. Only if these conditions are met can resources and capabilities be transformed into a source of competitive advantage (Barney 1991). It follows that a construction companys equipment, manpower, technical, and managerial know-how should be efficient, cost-effective, rare, and sophisticated enough to prevent imitation by competitors. Financial resources indicate a companys strength in the market in terms of its capacity to carry out projects. Adequate financial resources ensure the company can get into risky situations that have a prospect of high returns. As a companys financial strength increases, its credibility and reputation also increases among clients and suppliers (Warszawski, 1996). The majority of construction projects are funded by the owner who pays the contractor periodically, who in turn pays the subcontractors, the suppliers and other parties of the project for services rendered. The success of this routine depends on the financial strength of the owner as well as of the contractor (Gunhan and Arditi, 2005). Technical competency refer to the physical assets of a company such as machinery and equipment and the extent of technical know-how available that is necessary to undertake specific projects. According to Warszawski (1996), a companys technical competency can be assessed by analyzing the companys preferred construction methods, the experience of its technical staff, the productivity and speed of its construction activities and the quality of the companys output. Leadership involves developing and communicating mission, vision, and values to the members of an organization. A successful leadership is expected to create an environment for empowerment, innovation, learning and support (Shirazi, 1996). Researchers have examined the links between leadership styles and performance. Fiedler (1996), have emphasized the effectiveness of a leader as a major determinant in success or failure of a group, organization, or even an entire country. Experience is highly related to a companys knowledge management competency. Organizational learning can be effective only if the lessons learned from completed projects are kept in the organizational memory and used in future projects (Kululanga and McCaffer, 2001). Organizational learning is difficult for companies because of the fragmented and project-based structure of the industry. This difficulty can be altered by knowledge management activities and provision of a continuous organizational learning culture (Ozorhon et al., 2005). The image of the company compared with its competitors is important. As in all market-oriented industries, contractors also need to portray an image that fits the needs of the market and the clients targeted. It gives an impression of the products, services, strategies, and prospects compare to its competitors (Fombrun and Shanley, 1990). Contractors in construction industry have to portray an image that addresses the expectation and demand of the clients and users, like in all other market oriented industries. Moreover, image of a company may enable higher profitability by attracting better clients and investors and increasing the value of the product (Fombrun, 1986). Research and development capability is a response to increased industry requirements that occurred as a result of globalization and competition between the companies. Developments occur in all phases of the construction process and technologies emerge that are deemed to have a positive impact on competitive advantage. In contrast to the traditional conservative stance of the industry, construction companies are forced to develop and adopt new technologies in order to survive. Innovation capability is an important factor in achieving cost leadership, focus, and differentiation, hence enhancing competitiveness as stated in Porter (1980). A companys ability to innovate is related to the industry in which it operates. The traditional characteristics of the construction favor cost leadership obtained through lowest bids and focus obtained through specialization (e.g., tall buildings, sewage systems etc.) as the predominant competitive advantages. According to Arditi et al. (1997) innovations are rather incremental than radical in construction industry. The construction is a supplier dominated industry. Construction companies are dependent on other industries for innovations such as construction materials, equipment other than the technological innovations such as new construction processes and methods. Alternative corporate structures, financing methods etc. can also be added as the potential innovation areas in construction industry (Arditi et al. 1997). SKANSKA CONSTRUCTIONS CORPORATE STRATEGY Skanska AB is one of the worlds largest construction enterprises. With headquarters in Sweden, the Skanska group employs 54,000 people worldwide and provides construction-related services and project development. They create sustainable solutions and aim to be a leader in quality, green construction, work safety and business ethics. They also aim to maximize the potential of Skanska with regard to returns. They are a Fortune 500 company and a member of the UN Global Compact. Skanska is one of the worlds ten largest construction companies. Background of Skanska A brief history of Skanska is found in the website that reads (Skanska, 2010): The origin of the company dates back to 1887 when Aktiebolaget Skà ¥nska Cementgjuteriet was established and started by manufacturing concrete products. We quickly diversified into a construction company and within ten years the company received its first international orders. Through the 20th Century we played an important role in building Swedens infrastructure, including roads, power plants, offices and housing. In the mid-1950s, Skà ¥nska Cementgjuteriet made a major move into international markets. During the next decades we entered South America, Africa and Asia, and in 1971 the US market. The US is now our largest market and Skanska ranks among the largest in the construction sector. Today, Africa and Asia are not included in our home market concept. The company was listed on the Stockholm Stock Exchange A-list in 1965. In 1984 Skanska became the Groups official name. During the 1990s, Skanska initiated its most expansive phase ever. Sales doubled in only a few years. While the major portion of this growth was organic, a string of successful acquisitions also paved the way for Skanskas growth into a global company. Since the beginning of the 21st Century profitability rather than growth is a strong focus. The operations are streamlined to construction and development of residential, commercial and infrastructure projects in selected home markets in Europe and America. Skanska offers construction services in all of their home markets Sweden, the US, UK, Norway, Finland and Estonia, Poland, Czech Republic and Slovakia and in Latin America. Skanskas management structure is shown in Figure 2. Figure 2: Skanskas management structure (Skanska, 2009) Skanska aims to be a financial and qualitative leader. Their financial targets reflect the ambition to exceed the industry norm. In each of their geographic markets and specific segments, they have established what we call outperform targets. In addition to the financial targets and as means to reach them they have also adopted qualitative targets. The qualitative targets are expressed in Skanskas five zeros vision (Skanska, 2010): Zero loss-making projects. Loss makers destroy profitability and customer relationships Zero accidents, whereby the safety of their personnel as well as subcontractors, suppliers and general public is ensured at and around their projects Zero environmental incidents, by which their projects should be executed in a manner that minimizes environmental impact Zero ethical breaches, meaning that they take a zero tolerance approach to any form of bribery or corruption Zero defects, with the double aim of improving the bottom line and increasing customer satisfaction. The qualitative targets, as expressed in the five zeros, reflect their core values. The five zeros as well as the financial targets also provide the basis for incentive systems at various levels within Skanska. Markets of operation and market strategies of Skanska Skanska is active in selected home markets in Europe, the US and Latin America. In the US, which is their single largest market, they are a leading company within building and civil engineering projects. They are also targeting the US Public-Private Partnerships (PPP) segment. In the Nordic region, Czech Republic, Slovakia and Poland, their operations cover the construction and investment businesses. In Latin America, they are mainly active in the oil, gas and energy sector and in PPP. In the UK, they are a leading player in construction as well as within PPP. In 2006, there were 67 891 companies operating in the construction sector in Sweden. The biggest companies are Skanska, NCC and Peab. There has been an increase in the competition from foreign companies over the last years. It has been a rising market in 2006-2007. During the last four years the investments have increased with 5-10 %. However, due to the current market weakness, there was a decline in 2009. There is no legislation in Sweden stipulating how construction work and services should be performed. Instead, there are general conditions which have been developed by organizations and parties operating within the Swedish Construction Sector. Figure 3 shows the geographical markets of operation of Skanska including Sweeden, Norway, Denmark, Finland, Estonia, Poland, Czech Republic, Slovakia, Hungary, UK, US, and Latin America. Figure 3: Markets of operation of Skanska (Skanska, 2010) Skanska attaches special importance to metropolitan regions, which often demonstrate higher growth than their respective country as a whole. Skanska offers many of the products and services that are needed in growing cities workplaces, schools, hospitals, sports and leisure facilities, as well as housing and infrastructure for transportation, energy and water. In individual markets, Skanska operates today only in certain segments, but by taking advantage of its collective expertise, the Group can enhance its opportunities for growth and higher earnings in these markets (Skanska, 2009). Competitive advantage of Skanska (resources and capabilities) In Isik et als (2010) work, resources and capabilities was found to be most influential on company performance. The critical importance of the resources and capabilities of a company was also emphasized in the literature. The strategic management literature defines resources and capabilities as the strengths of a company. Given the competitive environment among the rivals, resources and capabilities cannot be assumed to be identical in every company (Porter, 1980; Barney, 1991). Skanskas distinctive resources that create competitive advantage for them are as follows (Skanska, 2009): Size: Being a market leader positions Skanska well with the most demanding customers. Its stature also provides access to the best suppliers, which can live up to Skanskas promises to customers regarding timely delivery and quality as well as safety and ethics. Skanskas size gives it an advantage in the most complex assignments, where it uses its collective experience and know-how to meet the demands of customers. Only a few companies can compete for the type of projects where, aside from price, comprehensive solutions and lifecycle costs are of crucial importance. The Groups size and international profile are also attractive qualities in the recruitment of new employees. Technical competency: BIM, a computer-based method for detailed panning, coordination and more efficient execution à ¢Ã‹â€ Ã¢â‚¬â„¢ shall be used in Skanskas design-build projects, in which Skanska is responsible for both design and construction. BIM means greater standardization and also improves Skanskas ability to utilize the savings potential of its corporate-level purchasing efforts. Human resources: Skanskas skilled, dedicated employees combine expertise with the Groups overall focus on sustainable development in order to successfully deliver projects to customers. The Groups ability to transfer knowledge between different geographic markets also contributes to its strength. Image of the company: Skanskas brand has been built up during more than 120 years of working in many different countries. One element of the brand is the Groups Code of Conduct, which includes policies on employee relations, health and safety, the environment and business ethics. Financial resources: Financial strength is an important factor in maintaining the confidence of customers and capital markets in Skanska. It also enables the Group to invest in project development and assume responsibility for and invest in major privately financed infrastructure projects. Innovation capability: Business units of the Skanska Group specialize in project development or construction but often collaborate in specific projects. This strengthens the Groups customer focus and creates the prerequisites for the sharing of best practices, while ensuring efficient utilization of the Groups collective competence and financial resources. To take further advantage of synergies and bring together the Companys expertise, a number of support services are available to all units. These include the Skanska Knowledge Map, a web-based intranet tool that visualizes experts and teams of experts from Skanska on a global basis in selected strategic areas, for example Building Information Modeling (BIM), Green Business and Design/Build. By utilizing its specialized expertise in planning and executing projects, Skanska improves risk control, which in turn results in higher quality and profitability. Global collaboration thus leverages both earnings potential and the Groups abilit y to satisfy the needs of its customers. In the Skanska Group there are both operational and financial synergies that generate increased value for their shareholders. By being a global player, Skanska generates operational synergies mainly due to the potential for taking advantage of the local specialized expertise found globally in various business areas. Shared purchasing activities and product development also boost efficiency and contribute to greater synergies in the organization. The Construction business stream operates with negative working capital and generates a positive cash flow over time. This cash flow is invested in the Groups project development business streams, which have enjoyed very good return on invested capital. These investments also enable Construction to obtain new assignments that generate a profit for the business stream. Figure 4 illustrates how this system works. Figure 4: Synergies at Ska